The ROI in Expatriate Management

Expatriates, Working Internationally, Foreign Assignment, Cross-Border Employment

Mobile employees are used by international organizations amongst other things, to: effect international growth; be headquarters’ “mind and management”; transfer culture and values; and conduct technical troubleshooting. However, companies have traditionally failed to invest in their mobile employees to the same extent that they have in their local staff. The cause may be cost which, according to one of our client studies, can be five times as much administrative time and three to four times the compensation of a domestic employee. Perhaps employers consider this enough. Whatever the cause, there remain significant opportunities for improving the return on this “investment”, their engagement and attraction levels.

While the demographic shift occurring over the last few years necessitates a change in approach, companies continue to use a model developed essentially in the 1970s when the typical employee was male, the primary family wage earner, committed to a long-term career with a single employer and eager to see the world. Today’s expatriate can be male or female, is highly educated, worldly and has a working partner and — despite your best efforts — likely to work for multiple employers during their career.

A senior colleague was fond of saying that “high potential people will get to the top despite what you HR people do to them”.  Mobility is similar and those who are willing and inquisitive will for the most part, notwithstanding what is put in front of them, find a way to achieve their goal. These people are not our primary concern in this article. Younger managers are generally not drawn to international assignments out of curiosity. They have traveled extensively outside of employment and readily connect to the rest of the world through multiple platforms. They need more family support than their parents and (usually) most employers have been willing to provide. Plus the mobile “gene” is often no longer enough. An employer may determine that despite an employee’s willingness, they don’t have the competency needed to represent corporate interests in an overseas market.

Most HR folks would agree that a year on international assignment is worth five of domestic training and development, but how many organizations can you name that think of assignments as an investment? Most think in terms of the cost and, back in the day, the investment in a mobile employee could be recouped over a much longer career. It’s sometimes the work environment that imparts this development experience but business cultures tend to be similar, irrespective of location and especially in larger companies. An employee might be lucky enough to be thrown into an opportunity where they are allowed to innovate and experiment, but that’s not always the case. The personal growth that will outlive any structured training, comes from navigating and living in a different culture; the white space around work is where personal growth occurs and especially when a family is involved.

I attended a recent meeting comprising managers who had spent their entire careers in the same country. One person stood out. He listened intently, asked clarifying questions and contributed in short, clear sentences. These were skills learned in a multi-language environment, where clarity and understanding were critical to productivity and engagement. I learned later that he had had two assignments with a brand management company in Asia. We hear of companies planning to develop “international capability” through teleconferencing and increased travel. This qualifies participants only as a travel experts; no one becomes internationally experienced in business class, no matter how often they fly it.

Employers mostly “hope for the best” with expatriates. They seek volunteers and attract those with an inclination toward mobility, hoping that a star will emerge that will contribute beyond the cost of the assignment. Few act on the value created by the assignment and how this can be re-deployed or developed further. Returning expatriate retention rates are appalling because of this.

A recent experience underlined this problem. A returning manager with a very large international bank (a former colleague, in fact) found that her HR department wasn’t even aware that she was returning. Because no one had monitored her development or performance while on assignment, she had to re-earn her promotional spurs. What a shocking underutilization of an incredibly valuable asset — the bank had spent heavily on her assignment, only to create a candidate for departure. Fewer employees with the required skills and competencies means persuading those whose first choice is not a foreign assignment. The high-potential scenario once again: those ready and willing to undertake an international assignment will find a way to make it work. It is the less willing who have in-demand skills that we are going to have to find way to convince.

Hope For The Best.pdf - Adobe Reader

We are at a crossroads: a shrinking number of willing participants and an environment where employers are reluctant to invest further. To attract and support the less willing will therefore require better deployment of the funds currently utilized.

There are five major areas of expenditure in running a mobility program, none of which adds anything to making them more attractive or providing support for undecided families:

  • Tax Compliance — Monitoring and ensuring compliance with income tax, social security and corporate tax is now essential to mitigate risk. Many countries regard the tax generated from expatriates as an important revenue stream and will chase employers when they suspect underpayment by employees.
  • Employment Law Compliance — Immigration records are synced with tax records to assist revenue authorities improve revenue collection. Many countries place restrictions on foreign employment to facilitate payroll tax collection. Local employment requirements designed to protect lower paid locals impose costly severance and other conditions for expatriates caught in their net.
  • Employment Contract Administration — Often starts with a home country or point of origin employment agreement plus another in the host location to cover local payroll and work permit requirements. Multiple home locations and multiple foreign destinations results in an extensive matrix of terms and conditions needing to be integrated to maintain internal equity.
  • Benefit Plan Administration — Ensuring that local coverage is comparable or better than the employee’s entitlement at home, topping it up with an international plan or finding ways to continue membership of a home country plan (designed and integrated with the home country tax and social security systems), is only the start. Then there are currency issues involved in paying benefits, how a home plan is going to be treated under local income tax rules and how pension gaps caused by lack of participation in home social security or loss of tax deductibility as well as issues around medical diagnosis and treatment in a foreign language.
  • Home Location Administration — Employees never want to leave their home country social security plan and some literally can’t completely sever ties with their home country. Houses to maintain, elderly parents to care for, bereavements to deal with, discretionary medical or dental treatment all require continuing connectivity and for each home country, familiarity with local laws and practice is required by HR administrators.

It is not surprising then, why administration takes five times the work for mobile employees compared to locals. Additionally it is easy to see why the employers staff the function with an employee that is at home in the detail, but usually someone who rarely travels and has little empathy with the challenges faced by young families on a first assignment.

Not one of the items on this list increases the satisfaction or improves the life of an expatriate. Performing these tasks exceptionally well is only the basic skill requirement. Get them wrong or apply them inconsistently and administrators are tied up for weeks and employees disengaged. Erring on the side of “No” rather than “Yes” to a new request, thereby creating a precedent with rafts of administrative changes is also the norm.

We addressed earlier the question of value and cost. None of the items above do much to enhance or protect a valuable employee for the benefit of the employer. The significant professional development that is occurring during an assignment and its utilization in a further assignment or a further stretching role upon its completion should be of primary concern to the employer when competencies are at premium.

Employees are these days alert to only vague promises of how an assignment will progress their careers. They can point too easily to colleagues, similar to the young woman referred to above, who left the company within months of returning to their home location. Redirecting expenditure to systems that visibly enhance the brand, make the employer more attractive in a competitive world and that support wavering mobility would seem to be what the circumstances demand.

Creating a separate employment structure to manage a mobile workforce, as far as we can tell, has been around since the 1970s when first used to help Americans on assignment avoid U.S. social security payments. The Payroll Service Company or Global Employment Company emerged in the form we know it today in the early 1990s, when companies grappled with the original “War for Talent”.

The models that we worked on then were in the consumer goods sector to enable mobile managers to move seamlessly between new overseas markets. Since then we have contributed to models to help minimize tax exposure to cash-hungry developing markets, to improve employment and tax governance of an elaborate matrix of nationalities and host countries, to reduce social security exposure and to lift an employment brand to “best in class” and enable it to attract the best of the mobile skills available. The rationale and approach for each was unique in each case and sometimes did not involve unified employment. For each situation, the approach adopted aimed to differentiate the employer from its competitors. By definition, an off-the-shelf global employment solution does not exist; to optimize the opportunities each is designed around the needs and objectives of its sponsor depending on the objectives. However, a number of common outcomes were present with each:

  • A reduction in administration expense — a common employment structure radically shrinks employment agreements needed. A common employment platform means home leave, vacation, benefits, tax treatment etc and even compensation can be the same irrespective of where an employee originates.

Managing employment through a single company introduced a common legal platform and payroll regime. Despite the emergence of global pay scales, in many industries some employers continue to arbitrage labour costs by recruiting from different locations and omit compensation from their common approach with all other terms and conditions being identical. Some considered that severing ties with the home country to be too problematic and adopted common employment conditions but without a common employment entity. Whatever the degree of desired commonality, expatriates are treated the same, resulting in immediate administrative savings and creating the opportunity for automation. A single approach also permits centralization of administration as expertise in the expatriate’s home country is dramatically reduced. Central management leads to deeper holistic expertise and dramatic improvements in service.

  • Internal Equity — for many international companies their mobile workforce is their most important group because they are opening new markets and transferring skills, processes and values to new locations.

As we have seen, however, in reality they were often treated as the least important with equity non-existent within the group, as each expatriate had a different set of terms dependent upon where they came from or how strongly they negotiated. Using a global approach the terms and conditions for all expatriates become the same. Inequity occurs of course throughout HR programs but is amplified amongst expatriates and any measure to reduce it should be welcomed.Most important group.pdf

When thrown together in a host location, the one thing that expatriates have initially in common is their terms and conditions. The administrator gets the call when it becomes apparent that they are different which in turn contributes to the 5:1 ratio mentioned earlier and inevitably more cost.

In many industries and for some skill sets, common pay scales that cover the globe, continent or region have emerged. This has happened in recognition of two things: First, the scarcity of talent and its homogeneity — if you have the skills and are mobile you can command the same pay irrespective of where you come from; and secondly, the shrinking differences between the costs of living and consequently the requisite cost of living allowances. This often means paying more for the tables to calculate the difference than the allowance that results from the calculation. These factors, coupled with the recognition that many transferees may not return home and so why continue to anchor them to one location have begun to influence the move to common expatriate pay.

  • Compliance — a single, common employment entity will reduce the size of the compliance matrix that needs to be managed for personal income tax as well as corporate tax and social security. Matters of transfer tax and permanent establishment obviously don’t go away but they are clarified and use of an offshore entity can reduce risk and exposure for corporate purposes. However, the single most important advantage stems from the ability to provide oversight to income tax compliance around the world.

No local tax legislation provides insight into “how do we minimize tax exposure?”. CFOs, in the absence of clear black and white legislation, want to take a position of minimum direct impact to the company (and ideally, a predictable risk). Minimizing the complexity and number of locations in the matrix enables greater certainty. Penalties for failure to comply with income tax or social security are designed to encourage compliance, but revenue authorities will chase the employer irrespective of whether the employee is at fault placing corporate reputations at risk, as well as government approved licenses and other relationships that are predicated on the Company being a good corporate citizen. Companies can no longer afford a laissez faire approach to employee income tax compliance. A single employment company makes this less costly to manage and more effective at risk mitigation.

  • Talent Management — when companies adopt a global approach to expatriate management, it is often low-key, especially when the purpose is to reduce tax exposure. This is a lost opportunity and the approach can be promoted to potential new expatriates, especially those who have worked internationally for other employers. The structure, when marketed effectively, will demonstrate that the frustrations experienced with a prior employer are removed or minimized.

Common employment terms and conditions dramatically simplify the process of transferring an expatriate from one international location to another. The mechanism enables central tracking of all employees on assignment, and no one is left behind.

Without it the responsibility for home country redeployment falls to a local HR manager who has often never been on assignment, has no idea how the individual has grown, resents the perceived excessive pay and benefits and can only envisage the employee’s contribution as it was prior to the assignment. Consequently, the individual’s skills and experience are not put to good use causing early departure and destruction of value.

A simpler administrative structure introduces the prospect of benefits and features designed exclusively to support mobile families. The complex matrix demands that these be local arrangements designed for employees who stay home but modified to accommodate the expatriate. For example, EAPs designed exclusively for a mobile workforce and offering related services, benefit plans that are currency friendly to accommodate reimbursement in a location different from where the claim was incurred, host location orientation that is separate and distinct from real estate vendors and provision of spousal support services, etc. These can be customized to the profile of your workforce and prioritized and targeted at known frustrations and premature assignment failures.

Globalizing an expatriate program through the adoption of common terms and conditions and/or a single common employer is not only contemporary and timely but will:

  • Reduce the costs of expatriation;
  • Enhance success in the competition for scarce top talent; and
  • Mitigate financial risk exposure

The transition needs to be carefully planned and ideally, the experience of professionals who have previously undertaken these projects. These are once in a career projects with a high likelihood of failure which is dramatically increased when a well intentioned neophyte is asked to manage the project.

While ostensibly focused on talent management and therefore an HR initiative, a successful project will involve finance, tax and risk management across multiple jurisdictions and require an experienced leader who can coordinate and is familiar with the interaction of these functions in the management of mobility.

Norther Miner – June 2015

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